If income or output rises from Yt – 1 to Yt, then the desired capital stock would rise from Kt – 1 to Kt. However, with the shift to an expansionary FP in the midst of unemployment problem, a reacceleration of inflation is unavoidable. That is to say, it is repetitive in character. Yet they have much in common. Trade cycle is one of the important part of macroeconomics. The lowest point of depression is known as “trough” where income, employment and output is at the lowest possible level. In addition to these quantitative methods of control, selective or qualitative methods of credit control are also applied by the central bank to step up investment and consumption during the depressionary phase of the cycle. This is because, with an accelerator of 2, an increase in output of 10 units produces an increase in the demand for capital goods by 20. Quite righty, tax rates are raised to control both consumption and investment. Even then, economists contend that discretionary MP can significantly improve the economy’s performance rather than a steady growth of money supply at an annual rate of 4 to 5 p.c. 1. Milton Friedman—a noted critic of the fiscal stabilization policy—compares the government’s attempt to stabilize the economy to a “fool in the shower”. In other words, instead of a balanced budget, a surplus or a deficit budget should be pursued to achieve stability in the economy. The four-phased trade cycle has the following attributes: (i) Depression lasts longer than prosperity, (ii) The process of revival starts gradually, (iii) Prosperity phase is characterized by extreme activity in the business world. Unsold goods pile up because of low household demand. If it is to be employed as an instrument of macroeconomic stabilisation, it has to be contra-cyclical in behaviour. Output and employment levels are reduced. At the end, it must be said that (economic) globalization has reduced the effectiveness of macroeconomic policies. Let the capital- output ratio be 2. Thus, this accelerator theory posits a mechanical and rigid response of net investment to changes in demand for consumer goods and, thus, aggregatively, to changes in output or national income. At ceiling output, autonomous investment becomes nil. There occurs an interaction between multiplier and acceleration principle and the economy then climbs up to peak. Ans :False. ... Electronic markets Emphasis on the search phase of the trade cycle Typically an inter-organisational credit trade cycle Search Pre-Sale Negotiate EM. Depression is such a harsh economic situation in which the level of economic activity, national income, employment and output falls to lowest level. If he does not get result, he will attempt to turn up the cold water further. Additional and fresh investments lead to a rise in production. So when one or more phases of a trade cycle are executed via Electronic medium (e.g., Internet), it is called E-Commerce Trade Cycle. Share Your Word File Under these assumptions, one can suggest that the economy is unstable; relatively ‘minor’ changes in the rate of growth of final sales and, hence, national income, will be translated into ‘large’ changes in net investment. Features: Economic activity is at a low level. Let us now suppose that an autonomous investment takes place. In Hicks’ model, autonomous investment takes place at a fairly constant rate over the long run. These two phases further have four or five different sub-phases, such as depression, recovery, full employment, boom and recession. Thus, during depression, a contractionary MP may be pursued by the central bank. Secondly, political compulsions may not permit the government to cut its public works programme during expan­sionary phase of the cycle. Privacy Policy3. Many factors develop which start the up-turn in the economy. … The output growth curve shows that at point A the slope of the curve is maximum while it is minimum at point B. Content Guidelines 2. Repayment of debt during the contractionary phase of the economy is likely to stimulate aggregate demand or spending. This phenomenon contributes to cyclical fluctuations. Join now. Now plants get utilized in a better way. 1. It can also provide unemployment allowance, poverty eradication measures, etc., so that incomes and consumption in the society rise in a multiplied form. During depression some machines wear out completely and, ultimately, become useless. That is to say, exogenous variables or external shocks have the potentiality of generating cycles. Welcome to EconomicsDiscussion.net! Businessmen now come to learn that they have overstepped the limit. Trade / Business cycle. ; Business cycle occurs periodically : The business cycle occur periodically in a regular fashion. 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